Reviewed by Finin2min Editorial Desk · Last reviewed 11 August 2026
Combine recurring-revenue growth with EBITDA or free-cash-flow margin and compare with the Rule of 40 benchmark.
Growth and profitability
Rule of 40 score
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Gap to 40
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The benchmark does not replace cohort retention, gross margin, burn and capital-efficiency analysis.
How This Is Calculated
The Rule of 40 states that a healthy SaaS company's growth rate plus profitability margin should sum to 40% or more — it's a single combined benchmark that allows fast-growing, less profitable companies and slower-growing, more profitable companies to both be considered "healthy" as long as the combined score clears 40.
Frequently Asked Questions
Why combine growth rate and profit margin into one score?
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Because SaaS companies trade off growth and profitability differently at different stages — a company growing 60% with -20% margin (score 40) and one growing 20% with 20% margin (score 40) can both be considered healthy under this framework, even though their individual metrics look very different.
What profitability metric should be used in the Rule of 40 — EBITDA margin or free cash flow margin?
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Both are used in practice; the important thing is using a consistent definition when comparing across periods or against peers/benchmarks, since the specific margin definition chosen can meaningfully shift the resulting score.
Confirm the current, in-force text governing SaaS Rule of 40 Calculator on the official source linked above - the summary on this page is an implementation aid, not a substitute for it.
Record the exact event/transaction date, since the applicable version of the law, form or threshold can change between the date of the underlying event and today.
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Before relying on this page
This page is a structured implementation summary, not the operative legal text. Portal or process acceptance of a filing does not by itself establish legal compliance - the underlying classification, authority, evidence and timeline still have to be independently correct. Where the facts are contested, high-value, or time-barred if delayed, verify the current position with the official source and, where appropriate, a qualified professional before acting.
Scope: Computes the SaaS 'Rule of 40' — a combined growth-plus-profitability benchmark commonly used to assess whether a SaaS company's trade-off between growth and profitability is healthy.
Calculation logic
Rule of 40 score = Revenue growth rate (%) + Profitability margin (%), where profitability is commonly measured as EBITDA margin or free cash flow margin, per the metric selected by the user.
A combined score at or above 40% is the commonly cited industry benchmark for a healthy balance between growth and profitability; below 40% is often read as a signal to reassess the growth/profitability trade-off.
Inputs and assumptions
The 40% benchmark is an industry rule of thumb popularised in SaaS/venture-capital commentary, not a formal accounting or regulatory standard, and its relevance varies by company stage (early-stage high-growth companies are commonly allowed a larger profitability deficit).
The profitability measure used (EBITDA margin vs FCF margin) should be consistent with how the user is benchmarking against peers, since the two can differ materially.
Exclusions and edge cases
Does not adjust the benchmark for company size or growth stage — the raw 40% reference is shown as a general guide, and the calculator's result should be read in that context rather than as a pass/fail test.
Non-recurring items in the profitability figure (e.g., one-time restructuring costs) should be normalised out by the user before entry, for a more representative score.
Sources
No external regulatory source applies — this is a general financial formula, not a statutory computation.
Review status: reviewed and approved by CA Nikhil Gupta on 18 July 2026.
Guides on this topic
Background, worked examples and the rules behind these numbers.